Credit-default swaps on European debt fell for a second day amid optimism policy makers will maintain support for the region’s sovereign bond market.
European Central Bank President Jean-Claude Trichet said emergency liquidity measures will be maintained and the bank will keep buying government bonds to ease “acute” tensions in financial markets. Bonds, stocks and the euro extended a rally triggered by comments from Trichet that investors interpreted as a sign he’d boost bond purchases.
The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings fell 23 basis points to 482, the biggest decline since Sept. 1, according to JPMorgan Chase & Co. at 3 p.m. in London.
“The euphoria we saw yesterday on speculation of huge, incredible upsizing of bond purchases by the ECB, nothing like that has materialized,” said Markus Ernst, a credit strategist at UniCredit SpA in Munich. “The reaction at the moment is very, very moderate.”
The Frankfurt-based ECB will offer banks unlimited loans through the first quarter over periods of seven days, one month and three months, Trichet said.
Policy makers met under pressure from investors to stop the debt crisis from engulfing Spain, the euro-area’s fourth largest economy, after the Irish rescue four days ago failed to persuade markets that officials have the resolve needed to contain it. Trichet’s comments mark a shift from his stance last month, when he said that the ECB could start limiting access to its funds in the first quarter.
The market was hoping for “a significant increase in asset purchases,” Gary Jenkins, a credit strategist at Evolution Securities in London, said before the announcement. “Spain and Italy combined need to raise close to 500 billion euros next year.”
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 5 basis points to 108.25, JPMorgan prices show.
The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 banks and insurers fell 12.5 basis points to 152. The subordinated index was 6.5 lower at 289, after earlier falling as much as 23.5 basis points.
Credit-default swaps on Italy dropped 1 basis point to 226 and Spain declined 8.5 to 303.5, according to data provider CMA. Contracts on Portugal decreased 19.5 to 458, Ireland fell 8 to 560 and Greece was 1 lower at 931. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments was unchanged at 187.
A basis point on a credit-default swap contract protecting 10 million euros ($13.1 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
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